CNO Financial Group Inc (CNO) 2004 Q1 法說會逐字稿

Thank you for holding and welcome to the Conseco teleconference. We will begin with an address by Tammy Hill, Conseco Senior Vice President of Investor Relations.

During the presentation, all teleconference participants will be in a listen-only mode. A question and answer session will follow the presentation.

If you need operator assistance at any time during the call, please press star followed by zero and an operator will help you.

Thank you for your attention and here is Tammy Hill.

Good morning, and thanks very much for joining us for Conseco's first quarter 2004 conference call.

Before I turn it over to Bill Shea and Gene Bullis, just a couple of reminders. We will be referring in the call today to information contained in our first quarter earnings release.

You can obtain the earnings release by visiting the new center section of our website at www.conseco.com. We expect to file our form 10-Q on Monday, May 10th.

The 10-Q will also be available through links contained on our website. The forward-looking statements being made today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements.

Please refer to today's earnings release and to our latest form 10-K for additional information concerning the forward-looking statements and related factors.

Also, as most of you know, we have filed a registration statement with the SEC for a public offering of common equity and mandatorily convertible preferred securities.

Because we are still in registration, we are unable to answer questions about the offering, the use of proceeds, or the financing plans. So our discussion on this call will have to be limited to the results released today.

And now I'll turn it over to Bill Shea, our CEO.

Thank you, Tammy. Good morning, and thank you very much for joining us.

We want to make a few comments about the quarter, and then we'll open it up for your questions.

Unfortunately, we were not able to take questions last Friday when we pre-announced our expected earnings for the quarter, so we know that you probably have a lot of questions now, and we want to take as many as we can.

Overall, we were pleased with most of the results for the quarter. We obviously were disappointed that earnings were hit by unfavorable mortality, but that sometimes comes with the territory when you are in the life insurance business.

We have looked very hard at the blocks of traditional and universal life business which showed a higher number of death claims--and we do not believe, at this point, that it represents a bad trend or overly troublesome issues going forward.

As we noted in this morning's press release, our net investment income was below plan for the quarter due to two primary factors; lower new money rates, and prepayments, and our mortgage-backed securities portfolio.

In a moment, Gene Bullis will comment in a little more detail on both mortality and net investment income in the quarter. Our first quarter was another solid step in building the core fundamental value of the company.

We were pleased with our statutory basis results which included an estimated 54.8 million of net income before realized gains in interest paid to the parent company.

Also, we saw an increase in our combined risk base capital to 297% at March 31st. We were especially pleased with new sales levels from our career agency group at banker's life.

New sales of our supplemental health and senior life products at Banker's were 52 million during the first quarter, which was roughly 28% above the first quarter of 2003, and 12% above plan.

In addition to the health and life sales, Banker's Life collected $176 million of new annuities deposits. We believe that we are on track to meet our expense reduction goals for this year and beyond.

Our acquired blocks of long-term care business performed within our expectations, and we were very pleased with the recently announced consent order on the acquired block of Florida Home Healthcare Business.

As Gene will explain in a minute, the change we announced last Friday in our earnings guidance was simply due to the fact that first quarter was below plan, and including the first quarter, will make it very difficult to hit the higher end of the original guidance.

Also, you should keep in mind that our guidance excludes realized gains, and it also excludes any changes in interest or preferred dividends from our recapitalization.

Also, as we noted in this morning's press release, the expected grant described in our prospectives of approximately 3 million options to our offices, will have an exercise price equal to the higher of $21 per share, or the fair market value on the date of the grant.

This management team is committed to building this company into a real leader in insurance for senior and middle income Americans.

We are committed to earning our ratings back and we are committed to complete and open communications with our shareholders. Before we open it up for questions, I'll turn it over to Gene Bullis, our CFO, for a few more comments on the quarter.

Gene?

Thank you, Bill. Good morning. Just a few comments about the quarter's financials and then we will open it for questions.

As we detail indeed this morning's press release, net income for the first quarter was 49.9 million including realized gains of 12.9 million after tax.

Our book value per share at March 31 was $22.34 or $17.64 per share--excluding the accumulated other comprehensive income from FAS 115.

As Bill noted, earnings were below our original expectations due primarily to lower net investment income and unfavorable mortality in our life insurance business.

The net investment income was approximately 9 million below fourth quarter of 2003 levels, and included 6.2 million of premium amortization from prepayments on investments, which is a non-cash charge essentially caused by the fresh start mark to market of the portfolio.

New purchases of investments were at lower new money rates.

We were anticipating-- we were anticipating increasing interest rates which have in fact materialized since March 31. The unfavorable mortality experience was simply due to higher than normal death claims during the quarter, specifically we had 4 ,080 death claims in the quarter as compared to 3 ,506 in the first quarter of 2003.

The quarterly averages for the second, third and fourth quarters of 2003 were around 3 ,300. Mortality is usually higher in the first calendar quarter, but the level we experienced this quarter was unusual.

The average face amount of the claims was around 30,000, which was consistent with past experience.

We have looked hard at the experience and as Bill noted earlier, we do not believe that it signals any inherent underwriting problems. Our block of life insurance is fairly well-seasoned, and as we have noted many times, we are not writing significant amounts of life insurance through independent agents while we have a B rating.

Loss ratios in our supplemental health products were, on the whole, in line with our expectations. As is usually the case, some were up and others were more favorable, but in total, our health lines came in within expectations.

A couple of important points to note with regard to our guidance now being at the lower end of the original range of 175 million to 200 million for the 12 months ended September 30th, 2004.

As we have said this guidance excludes any impact from realized gains on investments and it also does not attempt to adjust for any one time or unusual items. Our expectation that we will now be at the lower end of the range of guidance is not a revised assessment of the underlying earnings power of the business going forward.

It is simply factoring in that the quarter ended March 31, excluding realized gains, was 37 million of net income. We are also still confident in the underlying earnings power of our business, and we're committed to managing it to sustain growth and profitability.

After our recapitalization is complete, we will be able to provide public guidance for the full year 2004, which will factor in the impact of the recap. And now I'll turn it back to Bill and we'll take your questions.

Thank you, Gene. We'll now open it up to your questions.

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, you may now press the star followed by the one on your phone.

If your question has been answered, or you wish to withdraw your request, please press star followed by two. One moment while we take our first question.

Please stand by before we take your first question. Again, please stand by as we take your first question.

We'll take our first question of the day from [Nigel Daly]. Please proceed, sir.

Great. Thank you. First with mortgage prepayments, can you list maybe if the high level of prepayment activity has continued through April, is first. Second with, your accounting systems.

I think it's fair to say you were caught off guard by the results of this quarter.

Accordingly, can you update us what you're doing to improve your technology and accounting systems, so you as a management team, get more real-time information. And then, lastly on the adverse mortality, do you have an early rate on life insurance claims [inaudible] this quarter? Thanks.

I'll take that. With respect to prepayments, we did start to see a- a slow down in prepayment rates--relatively high January and February, slowed down in March.

And then now in April, they're slightly below the March level. So it's - it's mapping very closely to what's going on with interest rates, and so we're seeing a further decline in what was a - was a relatively high level in - early in the first quarter.

With respect to technology, we are undergoing a substantial system simplification process. We expect that overall, it's going to take a couple of years, frankly, to get all of our systems aligned and re-groomed.

We've taken our policy admin systems down from something in excess of 30 down to 4 or 5.

That will take several quarters to complete, and we believe that that will really have a fundamental effect on our ability to close quickly, and just have a better handle on all the information flowing through the company on a more real time basis.

Third question?

Death claims so far.

Mortality in the month of April was very close to expected, and certainly in all three months of the first quarter, we had higher - actual to expected was adverse and April, it's right in line with expectations.

Great. Thank you.

And we'll take our next question from Mr. Tom Gallagher, please go ahead.

Good morning. First question is the severance expenses of 4.4 million in credit agreement charge of 2 million. Can you just comment on levels expected on the quarterly basis for the rest of the year.

We would expect to have some modest severance ongoing, but we also expect to have, to see the benefits of that relatively quickly in terms of payback.

So probably lower than Q1, but some modest level of severance as we move forward and continue to get our cost, achieve our cost reduction programs. Second question?

Bank charge.

Bank charge is - it's related to a somewhat unusual phenomenon. We have in our current credit agreement a $6.5 million obligation for a financing fee if we do not refinance the banks debt by June 30th. And we are accruing that ratably over the period. Based order our current refinancing expectations, it's likely that that cost will not be incurred.

Okay. Question, next question is on some of the loss ratios.

I know it looks like the long-term care runoff book had a stable loss ratio, but Banker's edged up. So if you can comment on how you're looking at that, and also specify disease at Conseco Insurance Group, that loss ratio also went up. Can you comment on those two things.

Sure. We are monitoring loss ratios in all the lines, but specifically on the Banker's line, it did edge up.

We are evaluating the impact of that loss ratio in terms of pricing of new product.

We, in fact, are taking a look at that as we look out, but we don't think that there is a secular trend here that changes our prospects on the business.

Have you - have you monitored those two areas thus far in April and how do those trends look if you have?

No. We don't really have that kind of information available to us for April yet in terms of benefit ratios.

That requires, you know, an accounting close, and we really need to know reserve changes. So we wouldn't have that information yet.

On the specified disease, that's, that's a phenomenon that relates specifically to persistency and it was-- because that block has a return of premium reserve, the policy writer, when you have, you know, higher than expected lapses, you actually reserve-- release some reserve, and then when you have less than expected and in some situations there are even reinstatements, you have to reestablish the reserve.

So there was some fluctuations between Q4 and Q1 relative to that, but it kind of balances out and if you look at the two quarters together, it's a pretty normal loss ratio.

Is it interpretation - we shouldn't view that as deterioration, but you viewed that more as a function of the differences in the lapsed ratios Q over Q?

Exactly.

Okay, and then just one last question on persistency, I know you have had a pretty large runoff for the last year or year and a half of your fixed annuity blocks in Conseco Insurance Group. Can you just comment on if that continues, have you seen any stabilization or what's happening there?

Yeah. Actually we have seen quite a bit of stabilization, and - lapses, surrenders in Q1.

We're lower than Q4, although it's-- I think-- so there will be some fluctuations quarter to quarter, but we think it's pretty well stabilized out, and that's now, I think, more a function of interest rates than the company's ratings.

Okay. Thanks.

And we'll move on to our next question from Joan Zeft. Please go ahead.

Thank you. Good morning. I have two questions.

First is have you, since you released your preannouncement, have you heard from the rating agencies and, you know, can you give us a feel as to whether this miss affected how they were looking or if they were willing to see this as a sort of, you know, a non-event?

Then my second question is just Sarbanes-Oxley. Are there any issues or any added costs we should be thinking about as you move towards compliance there?

First, on the rating agency piece, we have had discussions with all the relevant parties and I would say that they're not particularly concerned about, you know, a few million dollars of earnings.

They're more concerned about the impact that that may or may not have on our refinancing. So I don't think that there's any-- based on the conversations we've had, and certainly the disclosures that we've put forth in our - expressing on this call, that - there's no particular issue relative to the earnings for the first quarter.

Sarbanes-- yeah, someone pointed out to me that the statutory results that we talked about were quite strong and consistent with expectations. That's a very important factor for the rating agencies.

The question on Sarbanes-Oxley, we are very engaged. We have a comprehensive program to assure compliance, and it is certainly resulting in a lot of effort and some level of cost, but we don't see it affecting cost trends.

Whatever is there is embedded. It will continue at least through getting through this initial compliance period, but we don't see any impact on our cost expectations for the year.

Thank you.

And we'll take our next question from Ms. Beth Malone. Please proceed.

Okay. Thank you. Could you just tell us the tax rate, looked like it was a little lower than what I had anticipated. Are we to -- what is the tax rate and what should we be assuming?

The tax rate for the quarter is a function of our expectation for the year. We do a projected rate and we apply that on a quarterly basis. So I think the rate that's in the quarter is the rate that you should expect for the year.

And that was?

35, two or three, something like that..

Okay.

Mid 30- between 35 and 36.

Okay. On the, on the progress in the sales, the new sales for Banker's Life, can you quantify at all whether some of this emergence of newer sales from the Banker's Life and even the Conseco Group is a result of your emergence from bankruptcy, now that the sales force is getting a little bit more comfortable with the outlook for the company or were there other initiatives that you guys put in place?

Well, I would like to say it has, it has something to do with bankruptcy. I'm sure to some extent it does. I mean as you know, our career distribution at Banker's really was rock-solid through the whole process.

They are getting excited about the company.

I mean there were things like milestones all the way along, including the sales of the GM building and things that were hit consistently to prove to them that we're not only coming back, but we were going to be back and very strong, a 10-point increase in risk-based capital certainly helps--and we've been out there recruiting new agents from captive distribution sources and that recruiting is going well, so we're really beginning to expand our franchise at Banker's and we've spent a lot of time on the Conseco Insurance side time keying up the specialty IMOs that we want to begin to sell the products as we get our ratings back.

We've told them in no uncertain terms that we're going to do everything in our power to get our ratings back as soon as possible. It's our number one priority.

We communicate with our distribution folks on a very, very regular basis and tell them everything we know about where we stand with rating agencies, and where we think we're going in terms of our overall numbers.

I think it's had a positive effect at Banker's, and I think it's beginning to have more of a positive effect at Conseco Insurance, but we clearly need an A-minus rating at Conseco Insurance.

Any good news seems to be welcome on the captive side because these folks have really committed to us for, you know, for our career. I mean they-- the average agent at Banker's has been around for quite sometime.

I've spent a lot of time in the field not only on the Conseco Insurance side, but on the Banker's side and feel very, very confident that as soon as we get our ratings back, we're going to see - we're going to see the company really move forward.

I am worried about competition taking business away from us, and so I expect that when we get an A-minus rating, you'll see - you'll see an immediate increase in activity and growth and sales both at Conseco Insurance and at Banker's.

It's going to take a little longer to get the sales moving at Conseco Insurance. We're down in terms of nap last year and in numbers that I think we'll be able to get back over the next 12-18 months.

Banker's is really hitting on all cylinders and I think there's good news to come as soon as we get - as soon as we get upgrades.

Okay. Thank you.

And we'll move on to our next question from Jukka Lipponen. Please proceed.

Good morning. Continuing on the sales front, your goal is to open - open up a bunch of new branch offices at Bankers. You opened up six. Is that included in your sales plan that you do get 170 offices up and running?

You know, it's, it certainly is. The -what's really going to move that forward is a ratings increase. We feel that we can get, we can get to 170 offices by - by the end of this year and certainly get into the mid 180s by the latter part of '05.

These are in geographies that we should - we should have been in and being unable to execute a strategy that's been keyed up for quite a while at Banker's has certainly - has certainly hurt us, but as ratings increases, new offices in place with very - with very senior people that were recruited from other companies, and also promoted from within, I expect that as the ratings go up, those sales numbers will improve.

Certainly, anything that's done this year and the beginning of next year will begin to get into our earnings numbers, but right now we're setting the foundation to really - to really build off of better ratings and hopefully a real launching pad in '05.

And in terms of the operating expenses, I guess you were-- some were roughly 12 million lower than what you were averaging during the four months coming out of bankruptcy.

Was that primarily sort of some of the, call it excess expenses, bankruptcy-related expenses that you may have been running, or was there some sort of real savings already realized?

Well, it's not so much bankruptcy-related savings, but our expense patterns do tend to be a little bit lumpy quarter to quarter, and higher in the fourth quarter than the first quarter on a typical basis. We're - we're confident that we will achieve our expense targets for the year.

We're slightly favorable in the first quarter, but not - not dramatically. So there is some sort of quarter to quarter seasonality, and also there is some level of extra cost that we were squeezing out of the fourth quarter that really isn't embedded in the run rate.

And the 20 million goal, is - that's all to drop into the bottom line this year?

Yes, we would expect so.

And last question, in terms of the investment income, considering where rates are now, and if you assume that for the rest of the year we stay at exactly where we are today, and looking at your portfolio yield, is your expectation that the - that you would not have any spread compression going forward or-- and I guess the other related question is, how much of the maturing investments that you have are at potentially significantly higher rates than your current portfolio yields, or the new money rate?

Well, I guess compression is a relative term compared to what. If we look at where we are, we were able to put money to work this month at - at higher than our average rates for the quarter by 30 or 40 basis points, so that's - that's positive news, and the - the new money rate, or the average yield in the quarter compared to the portfolio rate at the end of the quarter was very close, within two - couple basis points.

We don't have-- we have a very actively managed portfolio, so there isn't any particular bubble of high-rate stuff coming off, so I don't think that you'd see any instability from that.

And we're hopeful that a - a rising rate environment will improve yields overtime.

We're still - our earning is slightly lower than the rates that we used in the plan, but quarter to quarter, we think that, that the - that the spread compression should abate.

Thank you.

And we'll move on to our next question from Andrew Kligerman. Please proceed, sir.

Thank you. I first have some questions on expenses, on loss ratios, and then I'd like to follow up on your technology systems. With regard to the loss ratios that we saw in the release today, long-term care at Banker's came in at a little north of 89% and guidance had been 65 to 85.

So I'm wondering, you know, should we have some concern there and because you came in lower than guidance on your runoff block, you had 100 to 120% guidance on the loss ratio there, you came in at about 98, have things gotten better? You know, what are you thinking on the trends of those two lines in particular?

Well, I'm not sure what you're talking about with respect to guidance, but we look at interest adjusted loss ratios and--

I'm just-- you know, I mean, the interest adjustment would be-- is helpful, but just from a pure standpoint in the near term, we were expecting 65 to 85 for discussions.

Uh-huh.

With the company. So what, what might be, you know - -

Well, we don't, we don't see any particular trend that we think would modify our expectations. Loss ratios do fluctuate quarter to quarter. That's going to happen within some range. We're not in a position to change what our expectations are based on our current view.

With respect to the - the closed launch and care block, we were up slightly below, or the loss ratio was slightly higher than our model, but we also see several elements relative to what's happening with respect to claims processing and adjudication, and as we look forward towards the impact of - of how the Florida consent order will play out, that we think that our expectations continue to be realistic.

The 100 to 120 range?

Preinterest, yes.

Looking over to the technology and, you'll have to excuse me. I'm just really struggling to understand, you know, what exactly happened and I'm, you know, I'm going try to best analogy I can.

American International Group, which operates in, I think, 90 countries and, you know, you know how many businesses that - you can't even count their businesses, they reported earnings to the street on April 22nd, or 23rd rather, which was effectively, you know, a few days after you had started your road show.

And I really, you know, the reason I'm bringing this analogy up is, you know, what is it that you have to do technologically to get real-time information, you know, relative to a company that huge that can get it out in two or three weeks?

I'm just truly not understanding that, and then I have a quick follow-up.

Well, I - we're not AIG. I can't comment specifically about that. We are making significant progress in our underlying closing process as we, we are an early filer, an accelerated filer relative to our SEC requirements.

We're still taking time off of that schedule and improving the kind of information that we get on a real-time basis, specifically, we have plans in place and we're executing them and we expect to have the information on an increasingly, but more timely, basis.

I mean, how does this work? I mean, you have 30 different platforms currently or something like that or 20, and they all report to a central location?

Yeah, Andrew, we-- because of the number of acquisitions, particularly at Conseco Insurance, it's vastly different at Banker's, a company that's been around for 125 years. They are - obviously have an operating culture and a process that merits most, you know, well-run companies.

Conseco Insurance has, as we have pointed out many times, there really wasn't any fundamental integration. I brought in - in people that have - have done it before in health companies and insurance companies to truly integrate the system.

So we started off with something like 32 to 34 administrative systems.

We expect to cut that in half by - by the end of the year, and eventually as Gene said, get down to four or five systems. There'll be, you know, there'll be new software picked for a variety of things including, including sales and operations and financial systems.

This was something that probably, you know, you could have reasonably expected to be done over a number of years and it just wasn't.

There's certainly much better technology around now to integrate the kinds of systems we have without spending lots and lots and lots of money. You know, I believe that process is going - is going fine, and - eventually we'll have - a closing process that you should expect. It's several quarters away, if not a little longer than that, but I think the process is getting better and better.

The-- the difficulty is you can only move so fast with it because there are so many systems that frankly have been around so long that we have to close them down, get the information put on - on better systems and move forward.

I'm convinced that we have the right people doing it, and we want to be very careful that when we that, when we do close, it's a full close and frankly, a little of it is just being out of bankruptcy, the amount of time we've been out.

But you should expect as everyone else on the call, that each quarter we should improve our closing process and get better and better information.

It's not where we want it to be, but it's vastly better than when I came to the company almost three years ago.

Do I - do I - should I have any concerns qualitatively about the information when you ultimately do compile it? Should I - do have you any concerns about that?

Absolutely not. When we-- when we're done, we're absolutely done. We've done everything that a public company should do.

We go to great pains to make sure that there isn't any stone unturned with internal folks, all of our advisers, and we never hesitate to bring in our outside auditing firm or our consulting actuaries.

And when we're done, we're done. The process takes a little bit longer than ideally any of us would like to - to see, but when we are finished, we're absolutely convinced we have the right answers.

And Bill, sort of moving over to the prepayments, January, February, I heard it said earlier that you kind of knew that there were higher prepayments.

Do you - do you think that you could have extrapolated that, maybe into your guidance, you know, before you went on the road?

You know, in retrospect, looking back at this whole sequence of events, and obviously I'm sure you didn't want it to turn out the way it did, but in retrospect, do you think you could have extrapolated that a little better going on the road?

I think that - well, I know when we were on the road that I had an understanding that - that there would be some pressure on investment income as a result of prepayment. So it really isn't a question of not knowing that that was going on.

The real issue is understanding what the full impact of that would be throughout the financial statements and whether or not there we be offsets.

So we're talking about a - a you know, an $8 or $9 million number, and in the context of the size and complexity of that business, I guess I would say perhaps unrealistically with hindsight, an expectation was that while we knew we would have that issue, we didn't think that it was going to, you know, dramatically affect the results for the quarter because we were expecting other things would turn out better.

Okay. I guess just one last question, and I think it was alluded earlier, you don't want to discuss your offering, so I'm going to ask a question.

I don't know if it can be answered, but are you planning or attempting to, you know, produce your-- do your financing this evening, or later?

Yes, we expect to price after the close of the market today, Andrew.

Okay. Thank you very much.

I would also, I would also say that we certainly, we certainly are willing to talk about, you know, our process in terms of what we call system simplification and all of that, and we wouldn't hesitate for a minute to provide more information because I believe this closing process, which is obviously critical, is something that we'll spend a huge amount of time on, and in fact, announcing, announcing earnings today is a week - is a week earlier than we normally do it, and we try to take as much time and go through as much process and analysis as we possibly can to get to the right answer.

So normally, in a quarter where you wouldn't be out on the road or there wouldn't be anything happening, people would be grinding away, making sure they have everything, making sure all the analysis is done because of the way the company has, has developed through so many acquisitions at Conseco Insurance, but I can assure you that it's improving and it will get better and better, and my business experience in the past suggests that - that if we just keep going on the path we're going, we'll have the kind of reporting and analysis that - that you would expect from companies our size in this industry.

Thanks a lot.

And we'll take our next question from Mr. [Brian Warner]. Please proceed.

Hi. I was off the call for a few minutes, so I hope I didn't-- it's not redundant, but can you comment on anything you can tell us about your progress with the rating agencies, and maybe some sort of a timetable where you would expect to achieve perhaps certain rating levels; and secondly, if you could-- I don't know if you have any new thoughts on your tax asset and how that's likely to shake out.

Right. I'll take the first one, Bill Shea, and then I'll ask Gene on the tax one.

Okay.

We're obviously - we obviously talk about priority, one being our increased ratings and we've been - we've been communicating as actively as we can with all rating agencies without, without being someone that's standing on the door step every single day.

I would describe our relationships with the regulators as very positive. They've been extremely helpful--when they had questions or comments or asked us to do something, I think we've complied with all those requests in a very timely - in a very timely manner.

We expect to - to finish, the recapitalization, to refinance the bank debt, and be - and be right in front of our regulators absolutely at the first moment, in fact, we're preparing for those meetings right now.

My - my honest expectation is that we're ready for upgrades, and ready to move - to move forward in all of our ratings, you know, we don't make that call.

It's out of our hands, but we're going to do absolutely everything in our power to convince our regulators that we deserve an upgrade--which I truly believe we do, and hopefully it'll - it'll happen as soon as people get through their process of review, but we're going - we're going to make sure that they have every piece of information, every analysis they need to make - to make the right call.

Okay, and as a follow on that topic, your announcement about your earnings being at the lower end of the range, does that sort of-- is that a mute point for rating agencies, or is that--

I'll just give you my perspective.

I mean, it was a range, and I fully expect to be within that range, and clearly given the refinancing and the things we're trying to do, we're certainly going - going to put some more octane in our earnings and I would think that we have a lot of very, very positive things to say, and it's really, it's really good news being at the lower end of the, of the ranges is - in the range and we hope as, as the - as the year goes on that things will surprise us in a positive way, but we're going to keep managing this company aggressively, and move forward.

And I think when the refinancing is done, which is critical, for all of our regulators, we'll have an even improved earnings stream and an improved balance sheet, and I, you know, I keep pointing to the measures of the results and statutory earnings this quarter, as well as our increase in risk-based capital, and I believe all of those metrics are going to continue to improve, and as we look at ratings and we look at, and given our understanding of what we need to do, we believe that, that ratings upgrade in our opinion is imminent.

Thank you.

On the tax question, we have a very clear strategy and process that we're proceeding on.

I think we've been very explicit about that and we're progressing on that path. We - we have learned nothing that would change our expectations or our position on how we intend to file our returns.

Thank you.

We'll take our next question from Brian Warner. I'm sorry. From Patrick [Foul].

Hi. Good morning. This is Patrick Full from Calvert.

Could you break out a little bit what the components were on the - $180 million decrease in good will and also the change in other comprehensive income - I think you touched on it, could you break out the components, please?

The, the, the change is between two numbers. One would be the essentially the tax provision on come statement and the rest is the tax effect of the increase on unrealized appreciation going through OCI.

I think the-- it's $140 million of - tax on unrealized gains. It's just under $40 million of tax provision. Total is 178.

Okay. That's on the good will, right?

Yes.

And the other comprehensive income, were there-- you mention the earlier some of the numbers that flowed through that. Were there any other components?

No, it's essentially the - the impact of the change in the unrealized.

Yeah, we had, you know, the interest rate environment was favorable at the end of the quarter, so our investment portfolio had a larger unrealized gain associated with it.

The total increase in unrealized gain for the quarter was 448.7, but flowed down to comprehensive income is that number net of tax and excess amortization of costs of policy set forth.

Okay.

And I guess just to state the obvious that the number that's in good will can go up or down depending on what happens with the kinds of things that Gene Bullis and John Kline just said.

Obviously, I don't look at good will as the traditional kind of good will. It's simply our, our accounting, or the accounting for taxes given that we can't predict, or we can't - we can't demonstrate earnings at this point given the fact we're just out of bankruptcy.

But I would - I would expect by the end of the year we're going to be able to evaluate the reserve we have on the books, the reserve, the tax reserve we have on the books, and hopefully at some point we'll be able to reverse some or all of that reserve as we demonstrate to our outside accountants that, in fact, we're going to not only earn profits this year, but in future years.

Okay.

And then all of that - eventually after we get through all of, writing down all the intangibles, it will go to - it will go to additional paid in capital.

Okay. All right. Thank you very much.

And we'll take our next question from Mr. [Richard Hayden]. Please go ahead.

What were the actual cash taxes in the first quarter - in the quarter?

About $1 million.

As of $38 million between the GAAP versus the cash?

Yes.

Yeah, I mean, we obviously, we obviously believe, Richard, that we're not going to pay very much in - in cash taxes, as Gene Bullis mentioned earlier, we feel that we have very strong positions to sustain where we're - where we're headed with the IRS, and I think most, if not all of the people on the call understand the time frame.

So we - we took a tax return position. We're not paying - we're not paying much in the way of cash taxes, and that certainly is going to continue, and we believe that there is a big number in terms of future cash flows that we want to get back into this company as fast as we can.

So, hopefully by this August, we'll have, we'll have some rulings out of the IRS that we believe will be favorable to the company, and going forward for the rest of this year and beyond, we don't expect to pay a lot in cash taxes.

As a matter of fact, the Q1 cash tax is all state - state tax, and that has a different impact of net operating loss carry forwards.

Provided you maintain the integrity of the NOL, what would you use cash for in '05?

You mean what we do with the cash or what, what cash taxes would we have? I'm not sure I understand the question.

On a precash flow in '05. And I'm curious what you would use it for.

We would use it to invest in the growth in the business. We would evaluate our leverage position, and see how that worked out relative to capital, and deploy it in the best way to add value to the business.

Dividends and share repurchase part of that secular program?

Well, I mean eventually, Richard, they - they would be, but certainly - certainly it's something that management is considering, because the cash flow, frankly, is strong.

We think it's going to get stronger, so down the road, we have to make sure that we either, we either deploy the capital and earn at least returns of 12%, or you know, stock buy-backs, dividends are certainly something that - that we would consider and that's part of, that's part of the industry and the companies that we compete against, pay dividends, so, you know, that's certainly an expectation you should have, but not in the very near term.

You know, things could change, and hopefully the company will get stronger and sales will pick up, and who knows when that becomes a possibility, but it's certainly something that we're already considering.

Thank you. Good luck.

Thank you.

And we'll take our next question from Patrick Megan. Please go ahead.

Good morning, Bill, good morning, Gene and Tammy. How are you guys?

Good morning.

Good morning.

Good.

I was hoping to - trying to increase my understanding of your statutory earnings power. Could you first of all give me a sense for what your normal, or let's say 2004, annual stat earnings level is? You did 55 million in the quarter before the surplus notes?

Yes, we did. You know, we look at sort of our - our statutory earnings power in connection with also our overall gearing, particularly relative to the fees that we, that we earn, servicing fees that - result in cash flow back to the parent.

I think we're - we've demonstrated a consistently stable pattern from that point of view when we look at -at both what we've achieved the last several quarters, and we normalize even looking backwards for some of the things that we adjusted, you know, early in the restructuring period.

We're still in that, I think we've said in several cases that our available cash flow from insurance operations ranging from 200 to 250 million, that's still our expectation and - and we're on track.

And that available cash flow includes the service fees and the interest on the surplus notes?

Yeah, it does.

Okay. That's very helpful. The second question I have is on this contingent credit agreement payment.

What scenario is included in your current $175 to $200 million guidance? Are you expecting that you will not have to pay, and therefore reverse this accrual, and could you give me an idea of how significant the, you know, the potential payment would be?

Well, it is-- it's $6.5 million.

It's due on July 1st if we don't refinance the bank debt by June 30th, and in building the operating plan for the year, that was used to set, set - and the projections out of the restructuring process, we did assume that we would be able to refinance, but we didn't reflect any other changes relative to that refinancing in our operating model, for instance, lower debt or lower interest costs.

We just did - assumed we would not be paying that fee.

Okay. All right. Thank you very much.

We will take our next question from [Mike Marintino]. Please go ahead.

Hi. Gene, you mentioned you had some concern, as you were on the road show, about rising rates and what were the offsets that didn't come through that were disappointing?

Well, in closing the books we can have a list of 10 or 15 things of, you know, very small numbers individually that can add up in the aggregate.

One of the -one of the issues that we need to understand, for instance, with mortality, is, is, you know, the split - there is dynamic amortization in certain parts of the business when you have things like a mortality hit that creates an offset, we - that requires us to really close and understand, you know, how that mortality affects what books, and a number of other items that flow through the income statement, tend to produce minor adjustments to amortization that we don't have visibility to until we finally close, and there are just a number of other very, you know, not very significant items that can add up to, you know, $7, $8, $9 million pretty quickly. So nothing significant individually, but in the aggregate, produced an outcome that was - that was disappointing.

So those, just so I understand, so those small items all turned negative, that could have been negative or positive, but you had a number that were negative?

A number that were negative, yes.

Okay. Thank you .

And we'll take our next question from [Joseph Von Meister]. Please go ahead.

Yeah, my first question is, what was the balance of statutory capital and surplus at the end of the quarter?

One minute. Excluding AVR, $1,541,000,000.

Great. And what was the AVR and the IMR?

AVR is 49.7 million, IMR is 231 million.

And from the cash flow statement, can you give us the operating cash flow for policy income and from benefit expense?

Well, you'll have the Q on Monday. I think we'd rather disclose it all that way.

Thanks, guys.

And we'll take our next question from [Brian Binder]. Please go ahead.

Hi, good morning.

Good morning.

You know, we talked a little bit on the road show about the long-term care business and the Florida ruling.

And we're just - I know it was a recent ruling, but I wanted to see if the assumptions that were in place when you set up the reserve last year, obviously have been altered by the Florida ruling, and just was wondering if you've had time to sort of reflect on sort of the potential benefit, that is, in the timing that that would sort of show up.

Yeah, obviously we've thought a lot about it. You know, short short-term, we don't - you know, we don't see any, any, any benefit given the fact that the policy holders have, have time to pick option 1, 2 and 3.

We've thought about you know, what, what options would be better than others and I think - I think it's pretty straightforward.

But I think over time as I mentioned, our statutory - our statutory results will get to break even faster, and the assumptions to - during fresh start accounting obviously were assumptions that were put in place without a regard to the Florida solution.

I think I said on the road show, and can restate today that the Florida solution was very, very solid and positive for the company. We got - we got certainly a great result for our company.

We think they're kind of choices for policy holders that make a lot of sense, and the department of insurance looked at all factors, and I think it's a very fair decision.

Having said that, I would expect that given all of the things we did to - to change and to manage the business very, very closely, that overtime, positives will result, but for the - for the remaining quarters of this year, it certainly, it certainly won't - won't change our basic - our basic earnings model, but I would - I would expect improvements starting as early as - as sometime in, in '05.

It's going to take - it's going to take a while because the choices by policy holder are on premium renewal dates. So it's going to take a while to get through the entire system, but it's really overall nothing but positive, and we should expect positive results emerging.

I don't see - I don't see any down side at all to this ruling.

Thank you .

Do we have anything else, operator?

I am showing no questions. I would like to turn the call back over to Mr. Shea for closing remarks.

Well, thank you, thank you today for attending our call. I hope we answered all of your questions.

As always, we're available to talk to you further and as I said, earlier, we expect to - to price after the close of the market today, and thank you very much for your attendance, and I look forward to working with all of you in the future. Thank you.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect your lines.